GP Strategies Corporation
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Good morning. My name is Nelson, and I will be your conference operator today for the GP Strategies Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Thank you. I'll now turn the call over to Ann Blank, Director of Financial Reporting and Investor Relations. Please go ahead.

[Ann M. Blank:]

Thank you. Good morning, and welcome to GP Strategies Third Quarter 2013 Earnings Call. On the call today are Scott Greenberg, Chief Executive Officer; Doug Sharp, President; and Sharon Esposito-Mayer, Chief Financial Officer. Before we begin, I would like to remind you that today's comments will include forward-looking statements, which are subject to certain risks and uncertainties that could cause our actual results to be materially different from expectations. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC, which are posted on the Investors section of our website at gpstrategies.com. A replay of this call will also be available on our website later today. And at this time, I'd like to turn the call over to Scott.

[Scott N. Greenberg:]

Good morning. Thanks, Ann. And welcome to our third quarter 2013 conference call. Today, we will follow our usually -- our usual quarterly format. To initiate the call, I'll provide a brief overview of the results of the third quarter. Then, Sharon will present an in-depth financial analysis and then Doug will give some key updates on our recent major awards, including a current update on our major award with HSBC. After this presentation, I'll focus on our acquisition strategy, future vision and the company's plan for long-term growth, and then we'll conclude with a Q&A session. Today, we came out with our press release. And the third quarter of 2013, showed a significant increase in revenue and operating profit compared to the corresponding period in 2012. The important thing is this improvement came despite the significant effort that is being devoted to the start up of our global agreement with HSBC, which we signed in July and then followed up with local service agreements in September. So we are really ready to move forward on HSBC. We are also pleased with the success we are achieving in our Energy Group, and we continue to diversify our business internationally as our global clients look for increased levels of support. In addition, we've opened up over 5 offices, internationally during the quarter. Backlog, which is a key measurement of our company, increased to approximately $237 million as of September 30, 2013, which compares to $202 million at September 30, 2012, the corresponding period, or an increase of approximately 17%. However, in the backlog, consistent with the second quarter, HSBC is only reflected for approximately $7 million of this backlog. We are both pleased with the success that we're having in diversifying our business internationally, and additionally have received major awards in our Energy Services Group and other operations. As far as revenue goes, revenue increased dramatically for the quarter from $99.7 million to $113.2 million or approximately 14%. Revenue also increased from the second quarter sequentially from approximately $105 million or an $8 million increase. This is an extremely positive development as revenue typically decreases from the second quarter to the third quarter due to the seasonality of our business. It should be noted though, that revenue for the third quarter was only impacted by approximately $2 million from HSBC. We believe when fully implemented, HSBC will become GP Strategies' largest customer in 2014. So therefore, the primary revenue increases in Q3 came from other areas. In addition, during the quarter, as I mentioned earlier, there was a substantial diversion of key personnel working on integrating HSBC contract and again we believe we incurred costs, which are included in the quarter, and the costs will continue to impact our fourth quarter of operations. One of the things that the analysts look at is our trailing 12-month EBITDA. And in addition to the revenue, our trailing 12-month EBITDA is now at a record of $45.2 million or approximately $2.34 per share on a fully diluted basis. Despite our acquisitions in the quarter, our balance sheet remained strong. Looking at the market, while the training and outsourcing market is highly fragmented, we believe we have the ability to grow our operations, and our recent wins clearly state our position as one of the leaders. We believe our differentiators are our strong technical expertise, our global reach and our cost-effective solutions. This combination is really the key to our success. On previous calls, we discussed initiatives to expand in the financial service sector. With the major HSBC award and others that Doug will talk, by year end, we will have approximately 4 of our top 15 customers in the financial service sector on a run-rate basis. This win is already being noticed by companies in the financial service sector and other industries, and we're starting to get inquiries of that. In addition, Doug will discuss additional long-term contracts that we just received from numerous customers. Long-term contracts is important to GP as over 90% of revenue is typically generated from our recurring revenue base. Since 2006, we have made approximately 25 acquisitions, and we are continuing to see significantly more cross-selling opportunities. We have made these acquisitions predominantly through the cash flow generated from operations. In the future, we see expanding leadership training, e-learning, global delivery and major global outsourcings as the areas to grow our company. Our recent wins clearly demonstrate we are on the right path. With that being said, I'd like to turn the call over to Sharon, who will give a detailed financial presentation for the quarter.

[Sharon Esposito-Mayer:]

Thanks, Scott, and good morning, everyone. We reported third quarter revenue of $113.2 million or 14% growth over the third quarter of 2012 and $4.6 million or 5% organic growth in the quarter. Revenue in the Learning Solutions segment increased $8.7 million or 22% in the quarter. The revenue increases primarily came from the acquisitions that were completed in late 2012 and 2013. The BlessingWhite acquisition, completed on October 1, 2012, contributed $3.8 million of revenue in the quarter. The recently completed Lorien acquisition in June of this year, contributed $3.3 million of revenue and the Prospero acquisition, also completed in June, contributed $1.4 million of revenue. Revenue in the Energy segment increased significantly in the quarter by $6.6 million or 81%. $5.6 million of the revenue growth was due to an increase in alternative fuel projects. There was also a $600,000 increase in training, development and EtaPRO software sales and services. The Rovsing acquisition, which was completed in September of last year, contributed $400,000 of the revenue growth in the quarter. Revenue in the Sandy segment was flat at $16.9 million. The Sandy segment did experience a $600,000 increase in automotive sales training in the quarter, but this was offset by a decrease in revenue related to a nonrecurring 2012 launch event for a large auto customer. Sandy's third quarter results included publication revenue of approximately $400,000. We are projecting $2.5 million of publication revenue in the fourth quarter of 2013 consistent with the fourth quarter of 2012. The increases in learning and solutions -- excuse me, the increases in Learning Solutions and Energy were partially offset by a decline in the remaining segment. There was a $1.2 million or 6% revenue decline in the Professional & Technical Services segment. The third quarter revenue decrease is primarily due to a $1.8 million decrease in e-learning content development for the federal government and a $1.5 million decrease in Homeland Security and environmental remediation services due to contracts concluding. These decreases were partially offset by a $2.3 million increase in revenue in the quarter related to a training content development and delivery contract for a state government client. Revenue in the Performance Readiness Solutions segment decreased in the quarter by $600,000 or 5%, primarily due to a decline in sales enablement, training development and system implementation training due to various project completions. Year-to-date, revenue increased by $24 million or 8%, the automotive sector comprised 16% of revenue, down slightly from the 17% it comprised for the 9 months ended September 30, 2012. And the U.S. government remains our second-largest market sector, comprising 10% of revenue in 2013, down from 13% in 2012. As Scott mentioned, the financial services sector continues to grow and comprised 9% of revenue in 2013, up from 6% in 2012. GM remains our largest client and comprised approximately 8% of revenue in the third quarter of this year, consistent with 2012. Gross profit increased in the third quarter by $2.1 million or 12%. The acquisitions contributed $1.4 million of the gross profit increase in the quarter. The remaining gross profit increase came from the revenue increases discussed, along with cost reduction initiatives implemented in our Performance Readiness Solutions segment. Operating profit increased $2.1 million or 25%. This increase is primarily due to the increase in gross profit. SG&A expense increased $1 million in the quarter due to a $300,000 increase in amortization expense related to the acquisitions and a $700,000 increase in labor and expenses as a result of both the acquisitions and international expansion. The SG&A increase was mainly offset by a $900,000 change in the fair value of contingent consideration from what was recorded in the third quarter of 2012. We recorded a $135,000 gain related to a change in the estimated earnout payments accrued for certain acquisitions in the third quarter of 2013, which compared to a $792,000 loss recorded in the third quarter of 2012. We recorded $4.1 million of tax expense in the quarter, which compared to $2.1 million of expense recorded in the third quarter of 2012. In the third quarter of 2012, we recorded a $1.6 million tax benefit related to a reduction in an uncertain tax position. We also recorded an $800,000 loss related to the change in the estimated contingent consideration for which we received no tax benefit. Excluding these items in the third quarter of 2012, the tax rate was 40.5%, in comparison to the 40.1% we recorded in the third quarter of this year. We are projecting a tax rate of 39.5% for the remainder of 2013, with a larger portion of our 2013 income expected to be earned from lower tax foreign jurisdiction, which is the primary reason for the projected decline in the rate over 2012. Third quarter net income and earnings per share were relatively flat at $6.1 million and $0.32 per share. The $1.6 million nonrecurring tax benefit recorded in the third quarter of 2012 and $800,000 loss related to the change in contingent consideration had a $0.04 positive impact on earnings per share in the third quarter of 2012. Year-to-date, earnings per share were $0.84, down $0.02 from year-to-date September 2012. Excluding the nonrecurring 2012 tax gain and contingent consideration adjustment, EPS increased $0.02 year-to-date September compared to the same period last-year -- I'm sorry, increased $0.02 year-to-date September of 2013 compared to year-to-date September of 2012. Moving on to the balance sheet, we reported cash of $4.4 million and borrowings outstanding of $4.8 million as of September 30, 2013. This compares to $7.8 million of cash on hand at December 31, 2012, and no borrowings outstanding. During the year, we spent $1.7 million on contingent consideration payments for acquisitions previously completed, $900,000 on share repurchases and approximately $13.5 million on acquisitions net of cash acquired. We also spent $4.6 million on fixed asset additions year-to-date September, which was up $2.5 million over last year due to asset purchases in connection with the relocation of our headquarter's office in the third quarter, an increase in software licenses for our financial system and an increase in computer equipment purchases for our foreign operation. We generated $10.2 million of cash flow from operations year-to-date, which was comprised of year-to-date income of $13.6 million, plus noncash add-back to net income, including depreciation/amortization of $6.3 million, noncash compensation expense of $2.9 million, offset by $200,000 change in deferred income taxes and a $400,000 gain on contingent consideration. In addition, there was a $14.5 million decrease in cash from changes in other operating items, primarily due to an increase in cost and excess of billings on uncompleted contracts. That concludes the overview of the financials. So I will turn the call over to Doug at this time.

[Douglas E. Sharp:]

Thank you, Sharon. I'll start with an update on HSBC, a significant win for the company. In July, we signed a master services agreement with HSBC Holdings company in London and immediately started transition in transformation activities. As Scott mentioned, on September 30, we completed the negotiations and signed local services agreements with HSBC entities in the U.K., the U.S., Canada and in Hong Kong. Currently, we are developing work authorizations and conducting staff interviews and other activities as needed to on-board staff by late November in the U.K. and by mid-December in the U.S., Canada and Hong Kong. We also expect to negotiate local services agreements with a second wave of HSBC country entities by the end of the year. In summary, on HSBC, we are on schedule and expect to ramp up services in January and expect to be fully engaged by the end of Q2 of next year. Of course, keeping and expanding services with existing customers is as important as growing new accounts. I am pleased to report that we have completed a recompetition and won a follow-on work with several of our long-term customers. The first is General Motors, where we signed a 5-year publications contract. Typically these are 3-year contracts, and we're happy that General Motors felt comfortable enough with us to sign a 5-year contract this time. With Augustus Westland, where we signed a new contract for 3 years. Microsoft, where they extended our work for another year. Cigna HealthCare, where we are currently in the process of finalizing yet another 3-year contract with them. And finally, with UPS where we went from 2 LNG fueling stations to 13 to be designed and built throughout the next year. I might add that the first 2 stations are wet. Meaning, they've taken on fuel and are in service and being checked out now. So that's a good sign for UPS. So let me pause here, let me -- moving on, I guess. October typically marks the end of the season for the training industry conferences, where awards are given to recognize companies that are making a positive impact on the industry. GP Strategies usually fairs pretty well with these awards, and this year was no exception. We are recognized by e-learning industry as a top 10 content development company. And the Training Industry Incorporated recognized GP Strategies as a leader in no less than 5 categories, including workforce development, content development, sales training, leadership training and training outsourcing. CLO magazine, Chief Learning Officer magazine, gave us an award for our accomplishments, as a vendor partner with GE Industrial Solutions group. And Brandon Hall, recognized us with 5 different learning awards for our work with Microsoft, Hilton, GE and SunTrust. And I might add, I think, I said Cigna HealthCare was a 3-year contract, but it is a 5-year contract. And we're closing up right now. So in conclusion, one obvious benefit of this type of industry recognition is that it brings opportunities to us. Of course, so does winning new work with brand name companies, which brings to me -- which brings me to my final point. As Scott mentioned, we are seeing an uptick in discussions and proposals in the business sector -- in the banking sector. Our work with SunTrust, Bank of America, PNC and now HSBC, is garnering significant attention, which we hope to leverage in the coming quarters. With that, I'll turn it back to Scott.

[Scott N. Greenberg:]

Thank you, Doug. One of the questions I have received from the investment community is how do we take GP Strategies to the next level? Looking at the company, in 2009, we did approximately $219 million of revenue. And today, just 4 years later, we have roughly doubled the revenue. We believe there's substantial potential upside in major outsourcings in GP. And one of the things that you could hear today is underneath the top level of GP, a lot is going on building infrastructure, building support, building systems, getting HR in place, getting IT in place, to enable GP Strategies to support a much larger base of operations. So we have done that in the course of our ongoing operations. As I mentioned earlier, opening up offices across the world, getting HR personal across the world, getting IT sites, like data centers in Singapore. That's all been going on during this last 6-month period. And it's a major accomplishment in addition to the financial results that we have achieved in order to do this at the same time as on-boarding new accounts. And I'd like to congratulate both the operational staff and the administrative, financial staff of GP for accomplishing these goals while on-boarding major customers at the same time. The second thing, is acquisitions. When we talked the last time, the focus was on integrating HSBC on building the structure on a global basis, adding HR, adding IT, adding financial staff. But now, we truly have accomplished much of this and we believe, we truly have a global platform. With that being said, we talked about delaying acquisitions while we did this on our last call, and we only made 2 acquisitions in 2013. We bought Prospero out of Canada and we bought Lorien out of the U.K. We bought them during the second quarter and I'm pleased to say that both were highly accretive in Q3 to our results of operations. So they were nice tuck-in acquisitions. But that being said, we do look forward to resuming acquisitions which have been part of our strategy in 2014, as another avenue of developing our services and customer base. So it is something we look forward to next year again as we have been in the past. So I'd like to thank the shareholders for participating on this call. And moderator, we'd like to turn it over to the Q&A portion right now.

[Operator:]

[Operator Instructions] Our first question comes from the line of Kevin Liu with B. Riley & Co.

[Kevin Liu:]

First question here, the energy business obviously benefiting from the nice LNG win. Can you talk about whether you're at kind of a full run rate in terms of quarterly revenues from the big award? Or do you think it has room to go higher?

[Scott N. Greenberg:]

While we ramped up pretty quick, there is probably ability to go slightly higher on that. But you could see from the results that the Energy Group really ramped up overall nicely in the quarter. We do -- so I would say, a slight ramp up, but not a dramatic ramp up. Most of the ramp up did occur in Q3.

[Kevin Liu:]

Got it. And are there other opportunities like this within the pipeline? And when does this current award wrap-up?

[Douglas E. Sharp:]

So the current award, if you're referring to the LNG work that we're doing, will extend through this time next year. There are discussions with the same client for additional facilities and we are in discussions with other prospective customers that want to follow the UPS model as well, so we're optimistic. If you've been following the natural gas marketplace for transportation, it's been a bumpy road. Every -- no pun intended, but it's been bumpy up and down. We were happy to capture this significant award. There is a general feeling that more and more money will be spent in building out infrastructure and buying trucks to allow the use of natural gas for transportation. And a dropoff point-to-point kind of facilities, return-to-base operations, the kinds of things UPS is doing are well suited for that. There are other companies that are well suited as well. So we are -- in addition, we have proposals out for some work, nothing of this size, but more of the steady-state that we used to have. But we're in discussions with companies of -- projects of this magnitude.

[Kevin Liu:]

Great. And Doug, you had also mentioned, you guys were in renewal discussions or had already finalized some deals with folks like Cigna and others. Just curious, as you worked through those renewals, have you seen the scope of those contracts expand either from a geographical or kind of service offering perspective? And then any sense on whether there's been changes to placing on the existing work you're already doing?

[Douglas E. Sharp:]

Yes, so you know the drill right? So the procurement of these large corporations always want a recompetition and their interest is certainly quality and the like in performance and product, but they're after cost. So we work closely with our clients to figure out where we have leveraged some processes in the way we conduct business, where we can share some of that cost savings with them and not erode our margins. So we get to play on both ways on that. And then we have some hard discussions about quality versus pricing, but there's is a little bit of price pressures in some points. But it's quite frankly areas, Kevin, where we think we can manage that process. Now as far as the expansion, absolutely. Some of our Microsoft work has expanded nicely from moving away from -- not away from, but in addition to the content development into some of the learning services, technical support, training coordination support on a global basis. And that's helped us quite a bit. So, yes, we're seeing client expansion opportunities.

[Kevin Liu:]

Got it. And just one last question one. On the Performance Readiness Group side, I heard mention of some cost reductions there. Sharon, have we seen a full quarter of the impact? Or are there -- or will we see some additional savings next quarter?

[Sharon Esposito-Mayer:]

You will see a little bit of additional savings next quarter. The full cost savings changes that were made went into effect in the August time frame of the third quarter. So you'll see a little bit of additional improvement as we go into Q3 -- I'm sorry, Q4.

[Operator:]

And our next question comes from the line of Josh Vogel with Sidoti & Company.

[Josh Vogel:]

My first question is as you more aggressively ramp HSBC in the coming quarters, are there any notable costs or margin drag we should expect to see?

[Scott N. Greenberg:]

Well, you have seen, believe it or not, included in the numbers of the third quarter some type of margin drag as we ramp up. I would say most of the cost will occur in the third quarter and fourth quarter before we start generating revenue to develop profitability. So you did see some in the third, you'll see a little more in the fourth. But then ramping into the next year, HSBC should become an ordinary account at GP.

[Sharon Esposito-Mayer:]

Yes, Josh, just to add a little bit more color to that. We had about $300,000 of cost that we incurred during the third quarter that was incremental and specifically related to the rollout of HSBC. So I would expect that you could probably see a similar type investment, maybe even just a little bit higher in the fourth quarter of this year.

[Josh Vogel:]

Okay, that's helpful. And you still expect, they will be fully ramped by the end of Q2? I believe you said that in the last call.

[Sharon Esposito-Mayer:]

Of 2014, that's correct. Yes.

[Josh Vogel:]

'14? Okay.

[Douglas E. Sharp:]

That's middle of next year.

[Josh Vogel:]

Okay. And you still think that the annual run rate will be between $30 million or $40 million or is that changed?

[Scott N. Greenberg:]

Well, we still say they should be our largest customer, which means they have to be in excess of about $33 million, and we have no reason to modify that opinion at this stage. We still believe they'll be our largest customer.

[Douglas E. Sharp:]

It's important, really, they believe that so...

[Josh Vogel:]

Right. Sharon, you mentioned that publication revenue is going to be up, I think, it was about $3.5 million sequentially. As I'm looking at Q4, are there any other seasonal items to be focused on? Otherwise, we should be expecting to see a nice sequential revenue bump, is my thinking correct?

[Sharon Esposito-Mayer:]

Yes, Josh. The sequential publication revenue increase is 2 million. We did $400,000 in the third quarter and we are projecting $2.5 million in the fourth quarter of this year, which is consistent with what the publication revenue was in the fourth quarter of 2012.

[Scott N. Greenberg:]

Yes. The only difference, if you're looking specifically at Sandy, last year in Q4, we had a Jaguar ride and drive, which was a little over $1 million, which did not reoccur this year. So those are really 2 of the main drivers reflecting on Sandy.

[Josh Vogel:]

Okay. And I'm sorry if I missed commentary on it. I know P&T was down year-over-year, but a nice sequential bump there. Should this be the base, like quarterly run rate, we should expect over the next several quarters in that $19 million range?

[Scott N. Greenberg:]

Well, they're a little seasonal. So it's too early to tell. They had a strong third quarter. Part of that was due to the work that they got with the state of Maryland. They've had an up-and-down period. So I think, we need 1 quarter or 2 more to demonstrate that. So we're not ready to go on the record to say that the downturn is over, but at least the gap has been narrowed greatly.

[Josh Vogel:]

Okay. And Scott, I know we spoke a couple of weeks ago, I asked you about the state of Maryland, but are there -- have you seen any potential opportunities in other states with the healthcare changes?

[Scott N. Greenberg:]

So far, it's been minimal. We expect that as we get closer. And our work with Maryland is going over very well, but at this stage, we have not seen states knocking on our door to get the same type of work as we're doing for Maryland.

[Operator:]

Your next question comes from the line of Wayne Archambo with Monarch Partners.

[Wayne J. Archambo:]

On the M&A side, could you give us some sense as to pricing the environment? Are deal prices going up? With the market, the economy is improving and so forth, are you looking out at the next year and looking at more of an absolute multiple that you'll be paying for some of these entities relative to what you have paid this year or in years past?

[Scott N. Greenberg:]

Well, this year, we only bought 2 companies. Part of that is going to occur in which field it is and what service level you're getting, what the margin percentage is, whether it is more a content or a consultancy type of equation. If you look at the deals we've done in the past year, the EBITDA has gone up slightly. They have been more targeted in the 6th to 7th range. However, we think that with our global customer base, we are able to leverage it and cross sell. But to say, one size fits all is a little difficult. It's going to depend on the global reach, the customer base, the service level, what it brings to the table for GP, what cost we can eliminate in consolidation, that will play into the valuation that we give to a company when we approach the acquisition cycle.

[Wayne J. Archambo:]

But you do expect 2014 to be more active than you've been this year on the M&A side?

[Scott N. Greenberg:]

That is correct. Most certainly.

[Wayne J. Archambo:]

And seeing the HSBC transaction, sort of a transforming event for you folks, can you just give us a little bit sense of what was the sales process? I mean how many years have you been speaking with them? And was it a competitive bidding process or were you competing with multiple other vendors, or what was the process there?

[Douglas E. Sharp:]

We would be pleased to talk about that for the rest of the morning, but we'll probably bore everybody else. But just real quick, it started in around August of last year in 2012 and it started very classically with an open presentation by HSBC, followed by an RFI, Request For Information, where they did a down-select of suitable companies to 10. I think it was 10 that submitted proposals. They went from 6 to be evaluated further. And then they started a pretty rigorous 2-way due diligence process. It started around December of last year and worked its way all the way through about March and May with really working on multiple revenue streams, multiple capabilities, multiple solutions, large matrices of price points for different pricing streams and strategies. And during that whole process, being compared against, first 6 companies, then 4 companies and then 3 companies and then 2. So it came down to the wire between 2 companies and those 2 companies, I suspect one of course was us, traded places. But when it came time to finish -- get across finish line, GP was in the front. But it was quite a rigorous process that took -- that has taken a year. Longer than a year to get to this point. And particularly, about a year to get to the signing of the master services agreement. Does that help you at all?

[Operator:]

And our next question comes from the line of Jeff Martin with Roth Capital Partners.

[Jeff Martin:]

Scott, I'm interested in knowing more about the inquiries that you're receiving that are tied to your success on the financial services side. Are these predominantly financial services clients? Can you give an idea of relative size of those companies that are inquiring and what other industry sectors are inquiring?

[Scott N. Greenberg:]

Yes. Jeff, I'll let Doug answer that. But to start off, we always believe that if we won our first one, major one, and then start winning others in the financial services, it will really establish GP. The opening and the acquisitions we have made to get us global has really helped the past year. Opening up additional new offices on our own has really helped. So I really think the world is starting to believe that in this highly fragmented training marketplace, GP Strategies is becoming -- put into a unique position due to our investment, due to our global reach. Now the particulars, I'll turn it over to Doug and he'll give you an update.

[Douglas E. Sharp:]

Yes. So to Scott's point, we are getting opportunities outside of the financial sector, but the financial in the business -- in the banking sector is particularly hot right now, apparently just. So we are -- the types of interactions we're having range from -- again, we're being pursued. So phone calls coming in saying, "Can you come in and present and tell us how an outsourcing would work? What's the best way to do that?" And ranging from that to the other end of the extreme is, "Here's an RFP. Please, respond in the next 1.5 months." And so we're in the proposal stages. On one end of the spectrum, Jeff, and early, what I would call, semi-formal discussions on the other end of the spectrum. And there's probably, if I just think off top of my head, 4 of those -- all of them you would recognize the name.

[Jeff Martin:]

Okay. So they're predominantly financial services then? What other sectors or subsectors do you think this same model fits very well with?

[Douglas E. Sharp:]

Well, in general, when you look at our business, knowledge catcher, knowledge transfer, putting knowledge to work. We're looking for customers that have large employee counts -- headcounts, that have a relative complexity to the nature of their business and pursue -- and have change going on. So again, I mean, when you take those criteria and apply them to the financial market, the regulatory changes is huge right now. Penalty is flying, new regulations coming out. They are clearly labor-intensive. HSBC, 260,000 global employees, other banks in similar numbers. The one we just bid on, north of 100,000 global employees. And there's some complexity. I mean, it takes some thought and effort to get a workforce train up and running, so they can make a positive impact for the company, comply with regulations, make money for their client -- for their employer. So that's generally -- now you apply that to any company, so you'll see that the tax sector is strong, automotive is strong because the nature of the fact that their products change on a regular basis, technology, I think, I mentioned, software. So those industries, where they -- where you see a regular change. Where we don't see a large opportunity typically is where the products are pretty stagnant. So I usually give some examples, but I won't do it at the risk of mentioning some prospective customers on the call. But you think about a product line where it's pretty static. It's been the same product for years and years and years, maybe they changed marketing a little bit. That's the kind of industry that's not well -- necessarily well-suited. Now that said, our portfolio is grown through acquisitions. We're a lot stronger. Not only can we do the business process outsourcing, but we've got some real strong capability in leadership development and strong capability in sales training and sales enablement, and those have opened up additional customer -- markets for us. So that's a little bit of the strategy without naming specific industries.

[Jeff Martin:]

That's helpful color. Appreciate it, Doug. What -- does this lead you into potentially providing services beyond training to customers of this size? I mean, it seems like that could be a natural extension at some point in the future.

[Douglas E. Sharp:]

Yes. So without giving too much of our strategy away, but we start paralleling -- our training parallels with the whole sales enablement and how that happens, how companies generate revenue for themselves. So the fact that we are putting together information and touching our customer's customer and making an impact on net sales is arguably a little bit of a tangential stretch off of just pure play training and the like. Then the following up is we have some pretty strong capabilities in the consultative area, again around talent management, so closed. But we're generating some pretty good. It's connected to training, but it has to do with more performance consulting and developing talent management consulting base, which drives what knowledge should be captured and delivered to a workforce to make the most significant impact on that company. So there's some tangential parts there. And of course, there's the technology side that we have where we talk about our engineering and consulting capabilities that we spend a little bit of time on LNG and the like, and our power plant, engineering software, those kinds of products. So Jeff, where we can, we've taken some of that products and extended down. It's become a pretty important part of our company.

[Jeff Martin:]

Okay. And then one last question, if I could. What are some of the biggest challenges that you've faced in implementing a contract of the size of HSBC?

[Douglas E. Sharp:]

I think Scott touched on that. And the challenge is being addressed head on. And that is becoming a global company acting -- we -- I would argue, one might argue we were an international company. A couple of years ago, we had operations and capabilities in different companies -- or countries, I'm sorry. But now, we need to be a global company, which means that we really need to operate, work needs to be able flow around the world, similar processes, similar techniques to content development and learning and pulling all that together, pulling, as Sharon mentioned, pulling the back-office systems together to support the IT, the IS, the accounting, the -- across the board. That's all happening. We've got lots -- I would call it a challenge because it's something to overcome. It's all being managed, I think, very well. And it's all going on right now. And that's -- and once -- the cool -- the really cool thing, Jeff, is once we are there, we are there. I mean, so when these other opportunities we talked about present themselves, we'll have that global footprint, global infrastructure in place already and can easily leverage that for the next one. So I would that's our biggest challenge. I mean, we see ourselves growing and meeting the demands of the clients as a bigger challenge than even our competitors -- than looking at a competitor, whether that make sense or not. We're falling ahead of the curve, where it's now perfecting the way we do business is more important than worrying about a competitor.

[Operator:]

[Operator Instructions] Our next question comes from the line of Alex Paris with Barrington Research.

[Alexander P. Paris:]

I got on the call late, I apologize. I'm jugging a few calls this morning. Sharon, I'm sure you talked about the backlog, could you give me those numbers again?

[Sharon Esposito-Mayer:]

Yes, sure. At the end of the third quarter, Alex, we had $237 million of backlog and that compared to $202 million at the end of September of 2012, which is a $32 million increase -- I'm sorry $35 million increase.

[Douglas E. Sharp:]

We may add of the HSBC, how much of that is in there?

[Scott N. Greenberg:]

$7 million.

[Alexander P. Paris:]

Yes, that's what I was going to ask. The character of that backlog or the character of that increase.

[Scott N. Greenberg:]

$7 million is HSBC.

[Sharon Esposito-Mayer:]

Yes. And the rest of the increase, Alex, is really coming from -- there's a little bit of it coming from the acquisitions that we didn't have BlessingWhite in the end of the third quarter 2012. So there's probably about $7 million coming from acquisitions, the amount from HSBC. We won a relatively sizable job in the oil and gas space with a international client we had, as Doug talked about. I'm not sure at what point you came on. We had a renewal with Cigna. We've had some renewals from our other outsourcing clients and then we, obviously, have the UPS, LNG win in there as well. Those are some of the contributors for the increase.

[Alexander P. Paris:]

Okay, great. And then where do you expect CapEx for the year given these increases? It has been increasing, obviously, with the headquarters change and other infrastructure.

[Sharon Esposito-Mayer:]

Yes, it had increased. And the other thing that we're doing as well that's coming into play a bit with CapEx is we are building a data center in Singapore to support our Asia Pac operations. Historically, we've had 2 data centers, one in the United States and one in the U.K. And now we're trying to improve our performance and speed by adding one in Singapore as well. So we're at about $4.6 million of asset additions to date. That's not a number that we project, but I would venture to guess that we will probably spend about another $1 million to $1.5 million in asset additions in the fourth quarter in support of our international expansion.

[Alexander P. Paris:]

So that puts you at $6.5 million -- $5.5 million to $6 million for the year? And then would you expect this directionally to be higher next year?

[Sharon Esposito-Mayer:]

Yes, I think it will be. I don't think it will be as high as it is in 2013 because, obviously, we've had our headquarters move in there. I would expect it to come down to maybe somewhere around $3.5 million or $4 million as we look out to 2014.

[Alexander P. Paris:]

Great. That's helpful. And then a question with regard to acquisitions, just a follow-up on previous question. You said that -- Scott, that you expected the acquisition activity to pick up next year. Does that mean the business development activity is picking up as we speak? Are you looking at more potential acquisitions? Are there an increase in the number of properties available?

[Scott N. Greenberg:]

Well, the one thing that has occurred, Alex, due to GP Strategies' success, we are on the radar screen of both bankers when they're dealing in our industry. So I think we do get to see the majority of transactions that are in our space, which is probably much different from where we were 3 years ago. I will go on to say that the deals we'll be looking for in 2014 will be accretive deals like we had in 2013. We did 1 or 2 strategic deals that didn't have the accretion qualities of it in prior years, but the majority of our deals have been accretive and nice tuck-ins and that's what we'll be looking at going forward. While we -- even when we're not having been looking at deals for the last 6 months due to the integration of HSBC, we do see flow due to where GP Strategies stands in the training industry.

[Alexander P. Paris:]

Okay, great. And then the last question is with the success within the LNG business, I'm curious who are you competing with these opportunities? Who are the big competitors here?

[Scott N. Greenberg:]

Yes, I mean, there are a lot of competitors that are -- but looking at our business model, we built probably over 60 LNG refueling space stations today. So we are considered one of the leaders in it, but there are few competitors outside. But as far as number of stations, the 2 most that you would come to mind in the energy space, and the other major play that you would think of would be clean energy.

[Operator:]

And I'm showing no further questions at this time.

[Scott N. Greenberg:]

Well, thank you, moderator. And in conclusion, it's -- we're very happy to give you the update today. Hopefully, you learned a lot of what's going on at GP Strategies, and we look forward to our next conference call. So thank you very much.

[Operator:]

Ladies and gentleman, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.